Two weeks ago I wrote about the current debate over the 2010 paper by Ken Rogoff and Carmen Reinhart (hereinafter referred to as RR) on the correlation between debt and GDP growth. I said that the most important part of their work, which is the construction of an enormous database on debt and financial crises over the last few hundred years, was to be found in their book This Time Is Different and elsewhere. And their fundamental conclusion: debt is not a problem until it becomes one. And then it reaches a critical mass and you have what they called the Bang! moment.

It is a lazy summer day here in Texas, and the market and investment news front is rather quiet as well. But that will change before too long. We should enjoy the relative calm while we can, because Europe will soon be back in full crisis mode, coming off the summer. In today's Outside the Box we'll look at three brief pieces that may give us a preview of the near future, as well as an incisive retrospective on the recent past.

The relationship between high total public debt and interest rates is controversial (to some); and in today’s Outside the Box Van Hoisington and Dr. Lacy Hunt of Hoisington Investment Management tackle the subject head-on, in their “Quarterly Review and Outlook” for Q2 2012. They bring important new evidence to the debate, citing three academic studies (including an April 2012 paper coauthored by Rogoff and Reinhart) and an historical retrospective that focuses on the debt-disequilibrium panic years of 1873 and 1929 in the US and 1989 in Japan. In their view, the onus of responsibility for the “Panic of 2008” falls on the sometimes-slumping shoulders of the Federal Reserve, for making money and credit too easily available, and then “[failing] to use regulatory powers to check the unsound lending and the concomitant buildup of non-productive debt.”

There are political sides in America...and then there are political sides in the communist state of China. Here, it's a matter of the right and the left. In China, it's a matter of private enterprise and strong foreign investment versus highly centralized and debt-heavy state enterprise.

According to the geopolitical analysis company Stratfor, the left may be losing ground in China, and Beijing may be headed down an economic path that focuses on private enterprise. If the trend becomes the national strategy in the long term, this could mean greater room for private business in China.

I want to emphasize that I do not think Spain is hopeless. Rather, it has a narrow set of limited options that will require a great deal of austerity and economic pain on the part of Spain and significant help from the rest of Europe, combined with the forbearance and patience of the bond market or massive buying of Spanish bonds by the ECB for an extended period of time. I think it will need to be the latter, as the bond market is on the brink of breaking down on Spanish debt, failing a realistic path to economic balance and growth. The way ahead is most difficult and treacherous. It appears to me that at the end of the day only ECB participation can buy Spain the time it needs. If they give Spain the time, it can get through. But the pain will then be spread to the valuation of the euro and thus the entire eurozone.

I debated with myself about what to send as this week's Outside the Box. I have decided on a recent short but important post from my friend David Kotok, Chairman and Chief Investment Officer of Cumberland Advisors. He calls it "I'm Worried." There are some very thought-provoking ideas here, but what makes it particularly interesting is that I'm running into this sentiment more and more as I travel around the US; and when I'm abroad I also hear from people who are worried about the US. These are folks who rightly realize the world needs a strong US, both as an economic engine and as a leader –a chairman of the board, if you will –of a growing world. (Can the world grow and prosper without us? Of course, but not as easily, and the transition will not be pretty.)

Today's Outside the Box comes to us from Grant Williams, who covers the world from his perch in Singapore, in his always instructive and always entertaining Things That Make You Go Hmmm... I felt for him right at the outset today, because (like yours truly) he was trying really hard ... not to talk about Greece.And so, he announced, he was going to talk about Spain and about oil; but then, before he even made it through his opening paragraph, there was this:

"... ahhhh NUTS! They did it AGAIN.... ok... the Greek restructuring. It's not as though I could ignore it, now, is it? ... Oil can wait until next time.... no doubt it'll be an issue then too."

The "Quarterly Review and Outlook" from Hoisington Investment Management is one of the most significant pieces that crosses my desk – I try and drop everything else as soon as possible. This quarter's is no exception. The authors, Dr. Lacy Hunt and Van Hoisington, get right down to brass tacks with their opening sentence: "As the U.S. economy enters 2012, the gross government debt-to-GDP ratio stands near 100%." They cite an influential 2010 historical study of high-debt-level economies around the world, by Professors Kenneth Rogoff and Carmen Reinhart, that concluded that when a country's gross government debt rises above 90% of GDP, "median growth rates fall by one percent, and average growth falls considerably more."

I had the pleasure of spending the morning and part of the afternoon today with Louis Gave and Anatole Kaletsky at a seminar here in Dallas; and we shared a long lunch, where Europe and China were the topics of conversation. So, with their permission, here is their latest "Five Corners," in which Charles Gave and Anatole Kaletsky discuss last week's summit, and then engage in an internal debate about whether Italy really has a significant trade deficit with Germany. As I expect from GaveKal, it's not your typical analysis. And since I have to run to dinner – and glean more insights from their team (there will be homework when I get back!), this introduction to Outside the Box is short, and we can jump right into today's piece. Have a great week.

Today I offer a topic that might have missed your "news-net" coverage of the eurozone crisis, US debt insanity, and a possible global recession. Folks, we may have the modern-day equivalent of the Cold War on our hands.

Go ahead and let go of the images of McCarthy at the podium, the Sputnik launch, and reel footage of schoolchildren ducking under desks; this cold war likens more to Tom Cruise's Mission: Impossible than the original with Peter Graves. I'm referring to ongoing covert operations against Iran over its quest for nuclear capabilities, and its staunch position against the existence of Israel. After the defection of nuclear officials, the Stuxnet computer worm, and a few questionable "explosions," it is becoming increasingly clear that a cold war is being waged (and has been, since at least 2007) to ensure, simply put, some level of peace in the Middle East.

I have been reading and talking with Simon Hunt for a long time. He is a very thoughtful Brit who spends a lot of time in China and thinks about copper and commodities and cycles. He has enough seasoning to have seen a few cycles himself. This piece summarizes rather well the view that he has expressed for some time. And while I am generally skeptical of relying too much on cycles for specifics (they work until they don't), I think Simon has some very powerful conclusions. From his summary:

"The world is in a balance sheet depression which will make a second and perhaps more dangerous credit crisis almost inevitable. That should break out next year or in 2013.

Long-time readers will be familiar with Michael Lewitt, one of my favorite thinkers and analysts. He has gone off on his own to write his letter, and I am encouraging him to write even more. I call Michael a thinker because he really does. He reads a lot of thought-provoking tomes and then thinks about them. And then writes, making his readers think. The world needs more Michael Lewitts.

Today, he roams the world, commenting as he goes, starting of course with Europe. I have permission to use the first half of this most recent letter as today’s Outside the Box, leaving off the investment recommendations that he shares with his subscribers. If you are interested you can subscribe at www.thecreditstrategist.com.

In my letter earlier this week, our guest writer, Grant Williams, gave Europe about the same odds of escaping crisis as a pitcher throwing a perfect game in baseball. That's 40,000 to 1. Take a look at this decision tree on Europe (below) from STRATFOR, a private intelligence company. Looks like they give Europe something more like the odds of a major-league pitcher leading in home runs. Not gonna happen.

The developed world seems to be focused on Europe, and while the next crisis in indeed brewing there, we must not forget that Asia is a large part of the future and major contributor to world GDP. My friends at GaveKal are based in Hong Kong and have staff in most Asian countries or are in them on a regular basis, so I read their Asian views with interest. Today's Outside the Box is their latest Five Corners – Asia edition, where they look at China, Thailand, and Vietnam, as well as Asian growth, contrasting it to that of the "developed world."

This week’s Outside the Box is with an old friend to long-time readers, Ed Easterling of Crestmont Research. Ed is usually on the bullish side, but his research of late points to a few warning signs that say some cycle convergences may be pointing to problems. And that coincides with my macro concerns. As usual, lots of charts and data, but easy to read and understand. And, for those with stock market investments, very thought-provoking and timely.

I write this at 34,000 feet on the way back to Dallas. I met with a few Congressmen this morning and then ten Senators (!) this afternoon. It seems that some of them had read Endgame and rounded up a rather impressive group to come hear me speak for about 90 minutes. No Powerpoint, just off the cuff, with lots of very pointed questions, and they were taking notes (mostly). Some have been my long-time readers (go figure). It was bipartisan. Actually tripartisan, as independent Joe Lieberman was there, and asked some very hard questions. They cut me no slack and I gave no quarter. It was a very frank discussion. This is a group that is quite worried (I should say seriously worried) about our future, and they let me know there were more like them. On both sides of the aisle. It was actually somewhat encouraging, except that they are not optimistic. There was a sense of palpable concern that nothing might be done until we have a crisis, and so they realize the need to act. They are working to get their fellow Senators on board. Maybe there is hope. Without naming names, I was particularly impressed with the questions from a “Tea Party” Senator when I talked about the “glide-path option” and what going too fast would mean – as in a depression. I think he got it. We’ll see. He took the most notes, although Portman (who ran OMB so has a serious resumé and credibility on budgets) was going through paper rather fast as well.